Show V/O:
This is Alternative Allocations by Franklin Templeton, a monthly podcast where we share practical, relatable advice and discuss new investment ideas with leaders in the field. Please subscribe on Apple, Spotify or wherever you get your podcast to make sure you don’t miss an episode. Here is your host, Tony Davidow.
Tony:
Welcome to the latest episode of the Alternative Allocations podcast series. I'm thrilled today to be joined by Jackie Klaber, Head of Alternative Investments at Rockefeller Capital Management. Welcome, Jackie.
Jackie:
Thanks so much. Tony. Really glad to be here. And we're so grateful for the partnership with Franklin Templeton.
Tony:
Alternative Investments can provide a broad array of strategies and products. Can you provide more insight into your role at Rockefeller?
Jackie:
Absolutely, It's very open architecture in terms of our approach on the investment offerings. We look to provide our families with access to a range of alternative investments, primarily non-traditional asset classes. Think private equity, venture capital, real estate, private credit, infrastructure, and we've even done entertainment royalties, looked at art investments. So it's quite a broad range of asset classes that we cover from a diligence perspective and a structuring perspective.
Tony:
Super. So before we delve into kind of the deeper dive discussions, maybe it'd be helpful to talk a little bit about who is Rockefeller, who are the clients that you serve, and ultimately, what are they looking for?
Jackie:
Rockefeller Capital Management was actually created in 2018 as a leading independent wealth advisory firm. However, our firm dates back to 1882 as John D. Rockefeller's Legacy Family Office. And so we've helped the Rockefellers through seven generations of wealth transfer, and we bring that experience to bear for our families today. It was the past 50 years or so that our firm opened up to other families beyond the Rockefeller family. But that DNA of being a single-family office and interacting with so many generations of family in terms of wealth transfer and wealth advisory comes through in really all that we do.
Tony:
A very unique perspective indeed.
Jackie:
Since 2018, we've been growing very thoughtfully as a firm. And when I joined five and a half years ago, we really looked to build an open architecture investment platform that was going to be different from what other firms could do and have done across the street. So that's been in the minds of everyone at Rockefeller trying to improve upon other models out there.
Tony:
Fantastic. Let us transition then, to focus on communicating with clients. I think, as we were talking about before we got started, it's definitely a growing industry, and it seemed like everyone's talking about alternatives, but it's still a challenge. And I think one of the challenges that you and I were talking about is just communicating. A lot of the language is confusing the jargon that we use. How are you talking to your advisors? And ultimately, how are those advisors talking to clients about what sometimes can be these elusive sort of investments?
Jackie:
There's so much jargon out there. A lot of complexity, perceived complexity. We really try to unpack the strategies and make it very transparent on a fundamental basis. What are our clients going to be owning? What can they expect in terms of their portfolio? How much volatility or fluctuation in monthly values? How much enhanced return potential? What is this going to look like both at the individual strategy level and then at the portfolio level where it really matters, where everything comes together? So we really try to unpack the actual holdings within each strategy and explain the fundamentals and make it very intuitive for everybody.
Tony:
I think you and I are very much aligned in the sense that we like to think about investments from a goals-oriented perspective. Alternatives can be very confusing, but if we simplify it into what goal it plays in client portfolios, I think you have a specific sort of framework that you think about what roles can alternative play in client portfolios and how should advisors start to think about them.
Jackie:
That's exactly how we think about alternatives. What role do they play in client portfolios? There are two main buckets that we tend to use when categorizing our offerings. One is equity upside opportunities, capital appreciation opportunities, and the second is volatility dampening or absolute return-oriented strategies. We apply those two categories really across every offering, and you could think about those two buckets as aligning to the traditional 60/40 model in a way, and so really boiling it down to those basics. Every strategy we bring across, we categorize in those. When we're building client portfolios, we generally have kind of two sections. Those two sections equity upside, enhanced returns, and then that absolute return, steady yield-oriented opportunities is the latter category.
Tony:
And I think one of the views that we've had at Franklin Templeton and we've certainly been speaking about it a lot in the marketplace, we think there's a confluence of events that make this a really appealing time for advisors to think about alternatives. One is the market environment is demanding it. The market environment today is more challenging. You mentioned the 60/40 portfolio. You could put your client portfolios in cruise control when you're in the middle of the bull market. It's much more challenging today. Defined growth, defined income diversification is critical and of course we need to solve for inflation. The other element is product innovation, where a lot of advisors couldn't access a lot of alternatives because they were limited to institutions and family offices. So product innovation has come a long way. And I'd argue the third pillar of that stool, which is of critical importance, is having access to institutional quality managers. And in particular in the private markets, you don't want somebody who dabbles in that space, but it can feel a little daunting to advisors. And I know one of the things that you help advisors with quite a bit is how should they evaluate structure and strategy? I mean, due diligence I think is of critical importance in selecting the right fund and avoiding the wrong fund.
Jackie:
When it comes to the offerings, we view structure as a key determinant and component of strategy. And so when we're diligencing an offering and talking to our advisors about it, explaining the structure is very core to how we think about and explain the strategy. For example, one of the greatest innovations and really helpful tools in democratizing alts and extending alternatives to individual investors has been the creation of registered semi liquid funds. But in those vehicles, we think they're fantastic portfolio tools, but we're very mindful of liquidity and liquidity management. And so understanding how for instance, a private equity fund that offers quarterly liquidity is managing that liquidity, do they have a sleeve that's a cash management strategy. How staggered are the entry points in terms of the portfolio? Really getting our hands around that is going to help us understand what we can expect from a return perspective and a volatility perspective as well for our clients. So the structure becomes really core to diligencing the strategy itself. They're really very much intertwined. We spend a lot of time with our advisors going through the structure, going through the strategies and we're really an extension of their teams, joining for many client conversations and acting as that investment specialist on particular opportunities.
Tony:
And I can imagine that's really important because it is challenging to get into the weeds and really understand all of that. What are you seeing from advisor adoption? And you mentioned registered funds and we also believe that interval and tender offer funds have helped democratize alternatives. Are you starting to see more adoption of those sort of strategies? Are you still seeing advisors opting for the drawdown structure? Is it a combination of the two?
Jackie:
It's absolutely been a combination of the two for our whole range of clients. So even very sophisticated ultra high net worth clients, we are generally recommending a combination of the registered funds as well as the drawdown less liquid ten year types of opportunities. And we believe that pairing is really powerful. For example, historically when there were really only drawdown funds out there to access private markets, it took almost seven years to get fully allocated to have that private allocation. The nice thing about the registered funds, you get fully allocated day one, so there's not that J curve effect and you get vintage year diversification. So you can kind of backfill the portfolio. So for many of our families who may come to us with a big windfall looking to deploy cash, we can get them access to deals that were executed in earlier years by incorporating some of those registered funds. So sort of staggering, the vintage year, adding the element of diversification, and we sometimes even use the registered funds as a parking spot for capital calls down the line. Now we're mindful of liquidity, but if we expect to deploy, which we generally do, over a few years for the drawdown funds, having those registered funds in the portfolio can be a great starting point to get allocated and over time you can always reposition if there are drawdown funds you want to commit to. So we're absolutely using both across the board.
Tony:
If I can, I wanted to go back on where we started this discussion, which is this whole communication effort and it sounds like you're a party to a lot of those meetings so it's the advisor, getting them comfortable with it. But it seems to me one of the more challenging things for our industry is how then do we engage clients in terms that they understand and again, simplifying it so they understand the goals that they're solving for as opposed to not necessarily understanding the nuance of the structure? How have you sensed those conversations have gone over the last year or so? Are we starting to have clients who are more receptive to the idea? Are they cutting through the jargon a little bit better? Are your advisors doing a better job maybe explaining it than others?
Jackie:
There has been nice growth in alternative investments and a lot of receptivity. The impact that alternatives can have on the portfolio in terms of adding a level of diversification. When fixed income and public equities are acting in a more correlated manner, it can be really helpful to have strategies that are idiosyncratic and really not related to what's going on in the macroeconomic environment. And so, the past year where we've seen heightened macroeconomic activity and volatility with the Fed hiking very aggressively has been a great opportunity for folks to look at alternative asset classes that are going to be sheltered from a lot of what's going on in broader markets. And private credit yield-oriented strategies in particular, we've seen tremendous interest in those categories in the past year where you can really find elevated yields.
Tony:
So it's a perfect segue for maybe my last question here, and that is as advisors are starting to look at these strategies, where are you finding the opportunities. I know we've been writing and talking a lot about? We think, secondaries look attractive in the private equity space. You just mentioned alternative credit strategies broadly but private credit looks very attractive here. We see some parallels between 2008 where private credit really took off. Even in real estate, we'd argue that although offices look pretty challenging, industrials and other parts multifamily look attractive. Where are you finding the best opportunities and does that align with the sort of interest that you're getting from your advisors?
Jackie:
The opportunity sets that you just mentioned – private equity, secondaries, asset backed lending as well as direct lending or other parts of the private credit market – are where we've been adding a lot of opportunities and seeing a lot of investment activity, a lot of flows in that direction. We've been able to achieve really interesting risk adjusted return opportunities in those categories. Secondaries, in particular, with distributions being slower the past year, there's a lot of limited partners and general partners who are looking for liquidity and structural solutions. So we've seen those discounts for secondary purchases become elevated and really good entry point for secondary funds. So definitely a lot of interest in that category. Within credit, we have a lot of interest in asset backed credit. You mentioned real estate, the pockets that have more weakness or where they're going to need to refinance. We think that's a really interesting opportunity set. The Signature Bank FDIC receivership that occurred this past March is a big opportunity set for some of the fund managers out there to look at that portfolio. But it's just one example of the types of things we're seeing in real estate debt. So we're absolutely paying attention to that opportunity set and for the right places within real estate equity as well, that really can be a very tax efficient source of yield for individual investors. And so we continue to view private real estate on the equity side as an important portfolio tool as well, with the depreciation offsets that one can get.
Tony:
Jackie, fantastic. I think we've covered a lot of ground. I really appreciate the communication aspect so critical that we communicate to advisors and then ultimately to clients. I think that's of critical importance. I love the discussion around structure versus strategy because I think sometimes that structural discussion gets us bogged down in the minutiae and we kind of miss the role and the importance that these underlying investments play for us. And I think your outlook is very similar to ours, as we do see opportunities across the alternative spectrum, but not all opportunities are equal. And I think it's an opportunity for advisors to really kind of pick and choose where and how they allocate capital going forward. A lot of great insights today. Thank you so much and we appreciate you joining us on the Alternative Allocations podcast series.
Jackie:
Thank you so much, Tony. Great to spend time together.
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